IT dept clarifies acquisition cost of real estate bought before 2001 for LTCG calculations

The cost of acquisition of real estate properties purchased before 2001 will be the fair market value (FMV, not exceeding the stamp duty value) as of April 1, 2001, or the actual cost of the land or building for the purpose of calculation of long-term capital gains (LTCG) tax, the IT department has said.

The FY25 Budget has reduced LTCG tax on real estate to 12.5%, from 20% previously. However, the benefit of indexation was done away with for properties purchased after April 2001.

The indexation benefit allowed taxpayers to compute gains arising out of the sale of capital assets after adjusting for inflation.

For properties purchased before 2001, fair market valuation (not exceeding the stamp duty value) can be used as a base to determine the indexed price.

The indexed price will then be reduced from the sale price for calculating LTCG which will be taxed at 20%.

In a post on X, the IT department said an issue has been raised as to what would be the cost of acquisition as of April 1, 2001, for properties purchased before 2001.

For properties (land or building or both) purchased prior to April 1, 2001, the cost of acquisition as of April 1, 2004 shall be the cost of acquisition of the asset to the assessee; or the fair market value (not exceeding the stamp duty value, wherever available) of such asset as on April 1, 2001.

"Taxpayers can choose either option...," the IT department said in an X post on Thursday night.

The IT department gave an example of how capital gains tax would be calculated in the case of properties purchased before 2001.

It cited the example of a property whose cost of acquisition in 1990 was ₹5 lakh and as of April 1, 2001, its stamp duty value was ₹10 lakh, and the FMV was ₹12 lakh.

If this is sold on or after July 23, 2024, at ₹1 crore, the cost of acquisition as of April 1, 2001, would be ₹10 lakh (lower of stamp duty or FMV).

The indexed cost of acquisition in the 2024-25 fiscal year is ₹36.3 lakh (₹10 lakh*363/100), ₹363 is the cost inflation index for FY25 notified by the IT department.

The LTCG in such cases is ₹63.7 lakh (₹1 crore minus ₹36.3 lakh). At a tax rate of 20%, the LTCG tax for such properties would be ₹12.74 lakh.